October 13, 2010

Gov't Pensions: Pay More Now, Pay Less Later

Say what you will about David Brooks,* but he knows how to get a policy discussion rolling. Yesterday was a case in point. He wrote a column about the fiscal crisis of states, focusing on the problem of public pensions. This prompted a torrent of responses from liberal bloggers, including two particularly smart ones from Ezra Klein.

In the first, Ezra runs the numbers to show that (a) yes, public pensions are a fiscal problem (b) they have contributed to state fiscal woes far less than plummeting revenues or exploding health care costs. In the second, he outlines some of the remedies put forward in a recent Milken Institute paper and, in the process, gets at the real root of the problem:

States need to stop deferring so much of their employee's compensation. The current deal for most state employees is that they get worse wages than they would in the private sector and better benefits. Politicians like to cut that deal because it means they don't have to pay for anything right now. And when the market was making everyone rich, such deals even seemed affordable. But the faith that the market will continually hand you back 10 percent a year is now shattered, and so compensation schemes that relied on it have to be rethought.

Unions might not like that, but nor will taxpayers. There are two sides to deferred compensation: costs later, and savings now. We've been paying our public employees less than we would've needed to pay them in the absence of these pension promises. That means that going forward, we're going to have to pay wages closer to the true cost of our payroll. Public employees are already being compensated worse than their private peers, and you can't break pay promises and wildly increase that gap and expect to keep attracting the necessary talent. We're hearing a lot of indignation from people who were happy with the "pay less now" part of the deal but have taken a principled stand against the "paying more later" bit. "Pay the right amount now" is not going to please them, but it's the only viable solution.